EU undresses MNEs' beneficial owners in transparency push

The amendments were agreed by the Economic and Monetary Affairs and Civil Liberties committees on February 28 and are anticipated to plug gaps in the EU’s legislation intended to tackle money laundering and terrorism financing.

Overall, the changes allow wider access to beneficial ownership registers, broaden the scope of the Anti-Money Laundering Directive to cover trusts, virtual currency  platforms  and custodian wallet providers. Moreover, to discourage the use of anonymous pre-paid cards that facilitate money laundering, the threshold at which identification requirements kick in has been lowered from €250 ($263) to €150.

In addition, EU citizens would be able to access registers of beneficial owners of companies without having to demonstrate a “legitimate interest”, and trusts would have to meet the same transparency requirements as firms.

These developments suggest that stricter transparency rules to prevent tax evasion and money laundering throughout the EU is advancing at a quick pace. “It is a big step forward for global financial transparency,” said Simon Kirkland, senior UK political adviser at Christian Aid.

“Under former UK Prime Minister David Cameron, the UK led the world in adopting a public register of who the real owner of companies are ,” Kirkland said. Now other countries are considering following suit such as Afghanistan, Nigeria, Kenya and South Africa. “It is excellent that the EU is taking such strong steps towards transparency now,” he said.

For Chris Lenon, founder of Green Tax and former global head of tax Rio Tinto, the amendments are a logical trajectory for transparency initiatives. However, Lenon believes that the EU will be isolated in these policies with a slim likelihood of jurisdictions outside the EU adopting similar measures.

“The key issue with transparency is what is the purpose of transparency? Who are the legitimate beneficiaries? The danger is that the information available is misinterpreted if a non specialist reviews it. I understand the object of trust transparency but again what is the object? If the trust is not established and maintained to avoid tax or regulations, what is the public benefit of transparency?” Lenon asks.

A mixed reaction by businesses is probable, especially from MNEs that see the reputational benefit in disclosure. Private rather than publicly held corporates will likely resist, Lenon said.

The key issue of disclosing such information to the public is that a misinterpretation of it can lead to unjustified accusations. “Transparency will not reveal the purpose of a company or trust it will merely reveal its existence. It will not reveal its tax status or tax residency merely its form and ownership. As an example, a corporate may have a number of tax haven companies for historical or regulatory reasons. However, these companies may be tax resident in non-tax haven countries,” Lenon said. “Disclosure will not reveal this. As a result, a large amount of information may be disclosed but the key information may not. This allows someone to ask the right questions but does not per se provide the answers or motives of an ownership structure.”

“The danger is that the user will jump to the wrong conclusion. It will inevitably mean that corporates will spend time and money having to explain the disclosed information,” Lenon added.

The escalation in tax transparency initiatives are in response to scandals such as the LuxLeaks and Panama Papers, which have fuelled an increase in audits and a public awareness that has raised scrutiny.

MEPs went beyond the European Commission’s initial proposal from July 2016 to increase cross-border transparency on beneficial ownership and pushed for the public disclosure of trusts and other types of legal arrangements having a structure similar to trusts with ties to the EU.

Tove Ryding, tax justice coordinator at Eurodad, believes that allowing public access to identify owners of companies is important to closing loopholes that hide and exploit confidential arrangements. For instance, the Anti-Money Laundering Directive includes a clause, stating that if the beneficial owner cannot be identified then a member of senior management can be named instead. The changes agreed by MEPs mean this can no longer be done.

A number of other NGOs have been campaigning for tougher transparency rules in the EU – particularly Transparency International, which has also been very vocal on the debate for beneficial ownership registers. "We've closely engaged with the Commission and with the European Parliament on this and we think that what we have now on the table is a very promising text because it would require public disclosure of company beneficial owners and for some commercial trusts,” Elena Gaita, Transparency International’s EU policy officer for corporate transparency, said before the amendments were adopted.

She added that the recent amendment coupled with public country-by-country reporting (CbCR) would end the need for whistleblowers and leaks.

Tax transparency has never been more prevalent. Businesses actively discuss it in boardrooms, they publish company protocol on their websites and it is core to most corporate social responsibility practices.

In addition, public outrage from the tax scandals has spread an awareness to take action. Most recently, an international network of leading investigative journalists contacted 7,000 politicians in 20 countries to request they publish details of their own tax records as part of a new global drive for accountability and transparency in politics.

In most Nordic countries the details of both citizens and companies’ financial information including their tax returns is now publicly available. Finland calls it “national envy day” when it publishes its top earners’ tax returns, Sweden allows public access to its tax administration’s files, and Norway labels its fascination with each other’s taxes as “financial porn”, Reuters reported.

Perhaps the EU’s recent efforts in adopting fairer and transparent policies will strengthen an EU-wide standard. Setting a standard across international taxation policies has been a core part of the OECD’s BEPS Project and has allowed for better control of ending tax avoidance, especially considering that the inconsistent definition of beneficial ownership once complicated royalty payments when made cross-border.

Monica Bhatia, head of secretariat at the OECD global forum on transparency and exchange of information for tax purposes, said she would like to see organisations come together to work collectively on tackling the global tax issues.

Global corporate tax cheating awareness has risen over the past few years and is still a problem. A report by MSCI ESG Research examining the global tax gap found that 531 MNEs pay an average rate of 14.3% versus the 31.8% that would be expected based on the jurisdiction’s generation of revenue.

On beneficial ownership, Bhatia said that "everybody realises it's very important, but people don't seem to be pulling their expertise together to do this. So, in [2017], the big thing is going to be: How do we work better together? Let's not duplicate efforts. Let's not go in different directions. Let's not go for different standards – we have to have the same standard. Let's put our heads together and say 'how do we do this in a better way and relieve the pressure off countries as well?’”

Richard Murphy, chartered accountant and a political economist, anticipates that the coming months will be crucial to ensuring member states do not backtrack on this step towards full company and trust ownership disclosure. “The European Parliament, the Commission and the Members States will discuss the changes to the Directive in trialogue negotiations and a final decision is expected before the summer,” he said.